0000833640-20-000149.txt : 20200507 0000833640-20-000149.hdr.sgml : 20200507 20200507161930 ACCESSION NUMBER: 0000833640-20-000149 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200507 DATE AS OF CHANGE: 20200507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POWER INTEGRATIONS INC CENTRAL INDEX KEY: 0000833640 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943065014 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23441 FILM NUMBER: 20856740 BUSINESS ADDRESS: STREET 1: 5245 HELLYER AVE CITY: SAN JOSE STATE: CA ZIP: 95138 BUSINESS PHONE: 4084149200 MAIL ADDRESS: STREET 1: 5245 HELLYER AVE CITY: SAN JOSE STATE: CA ZIP: 95138 10-Q 1 powi-20200331x10q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 ____________________________________________________________________________
FORM 10-Q
 ____________________________________________________________________________
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______  to  ______
Commission File Number 000-23441
 ____________________________________________________________________________
POWER INTEGRATIONS, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________________________
Delaware
 
94-3065014
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
5245 Hellyer Avenue
 
 
San Jose,
 
California
 
95138
(Address of Principal Executive Offices)
 
(Zip Code)
(408) 414-9200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
POWI
 
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No 
Indicate by check mark whether the registrant submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
Accelerated Filer 
Non-accelerated Filer
Smaller Reporting Company 
 
 
Emerging Growth Company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Shares Outstanding at May 4, 2020
Common Stock, $0.001 par value
29,840,080
 
 
 
 
 



POWER INTEGRATIONS, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2
 
 
 
Item 6.
 
 
 
 

2



Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “if,” “future,” “intend,” “plan,” “estimate,” “potential,” “target,” “seek,” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and/ or adversely from what is projected or implied in any forward-looking statements included in this Form 10-Q. These factors include, but are not limited to: the novel coronavirus pandemic (COVID-19), which could significantly disrupt our operations, including our manufacturing, research and development, and sales and marketing activities, which could have a material adverse impact on our business and has or could exacerbate the risks discussed below; if demand for our products declines in our major end markets, our net revenues will decrease; our products are sold through distributors, which limits our direct interaction with our end customers, therefore reducing our ability to forecast sales and increasing the complexity of our business; we depend on third-party suppliers to provide us with wafers for our products, and if they fail to provide us sufficient quantities of wafers, our business may suffer; intense competition may lead to a decrease in our average selling price and reduced sales volume of our products; if our products do not penetrate additional markets, our business will not grow as we expect; we do not have long-term contracts with any of our customers and if they fail to place, or if they cancel or reschedule orders for our products, our operating results and our business may suffer; if we are unable to adequately protect or enforce our intellectual property rights, we could lose market share, incur costly litigation expenses, suffer incremental price erosion or lose valuable assets, any of which could harm our operations and negatively impact our profitability; and the other risk factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and in Part II, Item 1A -“Risk Factors” and Part I, Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. We make these forward-looking statements based upon information available on the date of this Form 10-Q, and we expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information or otherwise, except as required by laws.


3


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
190,459

 
$
178,690

Short-term marketable securities
232,183

 
232,398

Accounts receivable, net
20,597

 
24,274

Inventories
96,633

 
90,380

Prepaid expenses and other current assets
20,570

 
15,597

Total current assets
560,442

 
541,339

PROPERTY AND EQUIPMENT, net
123,430

 
116,619

INTANGIBLE ASSETS, net
15,748

 
16,865

GOODWILL
91,849

 
91,849

DEFERRED TAX ASSETS
1,739

 
2,836

OTHER ASSETS
34,231

 
34,388

Total assets
$
827,439

 
$
803,896

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
37,156

 
$
27,433

Accrued payroll and related expenses
10,921

 
13,408

Taxes payable
567

 
584

Other accrued liabilities
5,826

 
9,051

Total current liabilities
54,470

 
50,476

LONG-TERM INCOME TAXES PAYABLE
14,840

 
14,617

DEFERRED TAX LIABILITIES
162

 
164

OTHER LIABILITIES
14,137

 
14,093

Total liabilities
83,609

 
79,350

COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 13)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock
28

 
28

Additional paid-in capital
162,343

 
152,117

Accumulated other comprehensive loss
(4,314
)
 
(3,130
)
Retained earnings
585,773

 
575,531

Total stockholders’ equity
743,830

 
724,546

Total liabilities and stockholders’ equity
$
827,439

 
$
803,896

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
Three Months Ended
 
March 31,
(In thousands, except per share amounts)
2020

2019
NET REVENUES
$
109,664

 
$
89,188

COST OF REVENUES
53,184

 
43,714

GROSS PROFIT
56,480

 
45,474

 
 
 
 
OPERATING EXPENSES:
 
 
 
Research and development
19,152

 
17,946

Sales and marketing
13,473

 
13,017

General and administrative
8,761

 
8,390

Total operating expenses
41,386

 
39,353

INCOME FROM OPERATIONS
15,094

 
6,121

OTHER INCOME
1,777

 
1,152

INCOME BEFORE INCOME TAXES
16,871

 
7,273

PROVISION FOR INCOME TAXES
985

 
40

NET INCOME
$
15,886

 
$
7,233

 
 
 
 
EARNINGS PER SHARE:
 
 
 
Basic
$
0.54

 
$
0.25

Diluted
$
0.53

 
$
0.25

 
 
 
 
SHARES USED IN PER SHARE CALCULATION:
 
 
 
Basic
29,602

 
28,951

Diluted
30,134

 
29,446

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5


POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
March 31,
(In thousands)
2020

2019
NET INCOME
$
15,886

 
$
7,233

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments, net of $0 tax in each of the three months ended March 31, 2020 and 2019
(283
)
 
(22
)
Unrealized gain (loss) on marketable securities, net of $0 tax in each of the three months ended March 31, 2020 and 2019
(952
)
 
334

Amortization of defined benefit pension items, net of tax of $31 and $5 in the three months ended March 31, 2020, and 2019, respectively
51

 
16

Total other comprehensive income (loss)
(1,184
)
 
328

TOTAL COMPREHENSIVE INCOME
$
14,702

 
$
7,561

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6


POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
Three Months Ended
 
March 31,
(In thousands)
2020
 
2019
Common stock
 
 
 
Beginning balance
$
28

 
$
28

Common stock issued under employee stock plans

 

Repurchase of common stock

 

Ending balance
28

 
28

 
 
 
 
Additional paid-in capital
 
 
 
Beginning balance
152,117

 
126,164

Common stock issued under employee stock plans
5,529

 
4,500

Repurchase of common stock
(2,013
)
 
(7,302
)
Stock-based compensation
6,710

 
4,407

Ending balance
162,343

 
127,769

 
 
 
 
Accumulated other comprehensive loss
 
 
 
Beginning balance
(3,130
)
 
(1,689
)
Other comprehensive income (loss)
(1,184
)
 
328

Ending balance
(4,314
)
 
(1,361
)
 
 
 
 
Retained earnings
 
 
 
Beginning balance
575,531

 
402,569

Net income
15,886

 
7,233

Payment of dividends to stockholders
(5,644
)
 
(4,937
)
Ending balance
585,773

 
404,865

 
 
 
 
Total stockholders’ equity
$
743,830

 
$
531,301

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



7



POWER INTEGRATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
March 31,
(In thousands)
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
15,886

 
$
7,233

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
5,488

 
4,610

Amortization of intangibles
1,117

 
1,255

Loss on disposal of property and equipment
30

 
96

Stock-based compensation expense
6,710

 
4,407

Amortization of premium (accretion of discount) on marketable securities
154

 
(110
)
Deferred income taxes
1,095

 
1,161

Decrease in accounts receivable allowance for credit losses
(154
)
 
(180
)
Change in operating assets and liabilities:

 
 
Accounts receivable
3,831

 
(9,293
)
Inventories
(6,253
)
 
(4,223
)
Prepaid expenses and other assets
(3,992
)
 
(4,229
)
Accounts payable
8,828

 
1,220

Taxes payable and accrued liabilities
(6,349
)
 
(871
)
Net cash provided by operating activities
26,391

 
1,076

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(11,603
)
 
(3,459
)
Acquisition of technology licenses

 
(214
)
Purchases of marketable securities
(16,838
)
 
(4,793
)
Proceeds from sales and maturities of marketable securities
15,947

 
6,787

Net cash used in investing activities
(12,494
)
 
(1,679
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Issuance of common stock under employee stock plans
5,529

 
4,500

Repurchase of common stock
(2,013
)
 
(7,302
)
Payments of dividends to stockholders
(5,644
)
 
(4,937
)
Net cash used in financing activities
(2,128
)
 
(7,739
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
11,769

 
(8,342
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
178,690

 
134,137

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
190,459

 
$
125,795

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Unpaid property and equipment
$
5,250

 
$
2,533

Unpaid technology licenses
$

 
$
100

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes, net
$
305

 
$
378


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8


POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of Power Integrations, Inc., a Delaware corporation (the “Company”), and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial condition of the Company at the date of the interim balance sheet in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Power Integrations, Inc. consolidated financial statements and the notes thereto for the year ended December 31, 2019, included in its Form 10-K filed on February 7, 2020, with the Securities and Exchange Commission.

2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS:
Significant Accounting Policies and Estimates
No material changes have been made to the Company’s significant accounting policies disclosed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in its Annual Report on Form 10-K, filed on February 7, 2020, for the year ended December 31, 2019.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which modifies the measurement of expected credit losses on certain financial instruments. In addition, for available-for-sale debt securities, the standard eliminates the concept of other-than-temporary impairment and requires the recognition of an allowance for credit losses rather than reductions in the amortized cost of the securities. The Company adopted the new standard in the first quarter of 2020, effective January 1, 2020, using the modified-retrospective approach. For available-for-sale debt securities, the Company has made a policy election to present separately accrued interest receivable within prepaid expenses and other current assets on the condensed consolidated balance sheet. Upon adoption, there was no impact on the Company’s condensed consolidated financial statements.

3. COMPONENTS OF THE COMPANY’S CONDENSED CONSOLIDATED BALANCE SHEETS:
Accounts Receivable
(In thousands)
March 31, 2020
 
December 31, 2019
Accounts receivable trade
$
64,232

 
$
61,036

Allowance for ship and debit
(40,332
)
 
(33,475
)
Allowance for stock rotation and rebate
(2,694
)
 
(2,524
)
Allowance for credit losses
(609
)
 
(763
)
Total
$
20,597

 
$
24,274


The Company maintains an allowance for estimated credit losses resulting from the inability of customers to make required payments. This allowance is established using estimates formulated by the Company’s management based upon factors such as the composition of the accounts receivable aging, historical losses, changes in payments patterns, customer creditworthiness, and current economic trends. Receivables determined to be uncollectible are written off and deducted from the allowance.
 
Allowance for Credit Losses
 
Three Months Ended
(In thousands)
March 31, 2020
Beginning balance
$
(763
)
Provision for credit loss expense

Receivables written off
154

Recoveries collected

Ending balance
$
(609
)



9

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Inventories
(In thousands)
March 31, 2020
 
December 31, 2019
Raw materials
$
41,413

 
$
39,058

Work-in-process
33,809

 
25,982

Finished goods
21,411

 
25,340

Total
$
96,633

 
$
90,380


Prepaid Expenses and Other Current Assets
(In thousands)
March 31, 2020
 
December 31, 2019
Prepaid legal fees
$
157

 
$
16

Prepaid income tax
6,230

 
5,615

Prepaid maintenance agreements
1,318

 
819

Interest receivable
1,712

 
1,279

Advance to suppliers
4,204

 
3,579

Other
6,949

 
4,289

Total
$
20,570

 
$
15,597


Intangible Assets
 
March 31, 2020
 
December 31, 2019
(In thousands)
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Domain name
$
1,261

 
$

 
$
1,261

 
$
1,261

 
$

 
$
1,261

Developed technology
37,960

 
(26,730
)
 
11,230

 
37,960

 
(25,933
)
 
12,027

Customer relationships
16,700

 
(15,025
)
 
1,675

 
20,030

 
(18,098
)
 
1,932

Technology licenses
1,926

 
(344
)
 
1,582

 
1,926

 
(281
)
 
1,645

Total
$
57,847

 
$
(42,099
)
 
$
15,748

 
$
61,177

 
$
(44,312
)
 
$
16,865


The estimated future amortization expense related to finite-lived intangible assets at March 31, 2020, is as follows:
Fiscal Year
Estimated
Amortization
(In thousands)
2020 (remaining nine months)
$
3,242

2021
3,494

2022
2,415

2023
2,173

2024
1,279

Thereafter
1,884

Total
$
14,487




10

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for three months ended March 31, 2020 and 2019, were as follows:
 
Unrealized Gains and Losses on Marketable Securities
 
Defined Benefit Pension Items
 
Foreign Currency Items
 
Total
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
March 31,
 
March 31,
(In thousands)
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Beginning balance
$
583

 
$
(266
)
 
$
(2,484
)
 
$
(712
)
 
$
(1,229
)
 
$
(711
)
 
$
(3,130
)
 
$
(1,689
)
Other comprehensive income (loss) before reclassifications
(952
)
 
334

 

 

 
(283
)
 
(22
)
 
(1,235
)
 
312

Amounts reclassified from accumulated other comprehensive loss

 

 
51

(1)
16

(1)

 

 
51

 
16

Net-current period other comprehensive income (loss)
(952
)
 
334

 
51

 
16

 
(283
)
 
(22
)
 
(1,184
)
 
328

Ending balance
$
(369
)
 
$
68

 
$
(2,433
)
 
$
(696
)
 
$
(1,512
)
 
$
(733
)
 
$
(4,314
)
 
$
(1,361
)
_______________
(1)
This component of accumulated other comprehensive income (loss) is included in the computation of net periodic pension cost for the three months ended March 31, 2020 and 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


4. FAIR VALUE MEASUREMENTS:
The FASB established a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices for identical assets in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The Company's cash equivalents and short-term marketable securities are classified within Level 1 or Level 2 of the fair-value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
The fair-value hierarchy of the Company's cash equivalents and marketable securities at March 31, 2020, and December 31, 2019, was as follows:
 
Fair Value Measurement at
 
March 31, 2020
(In thousands)
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
Corporate securities
$
217,314

 
$

 
$
217,314

Commercial paper
161,858

 

 
161,858

Money market funds
1,707

 
1,707

 

     Total
$
380,879

 
$
1,707

 
$
379,172

 
Fair Value Measurement at
 
December 31, 2019
(In thousands)
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
Corporate securities
$
232,398

 
$

 
$
232,398

Commercial paper
146,955

 

 
146,955

Money market funds
2,983

 
2,983

 

     Total
$
382,336

 
$
2,983

 
$
379,353



11

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company did not transfer any investments between Level 1 and Level 2 of the fair-value hierarchy in the three months ended March 31, 2020, and the twelve months ended December 31, 2019.

5. MARKETABLE SECURITIES:
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at March 31, 2020, were as follows:
 
Amortized Cost
 
Gross Unrealized
 
Estimated Fair Market Value
(In thousands)
 
Gains
 
Losses
 
Investments due in 3 months or less:
 
 
 
 
 
 
 
Commercial paper
$
14,869

 
$

 
$

 
$
14,869

Corporate securities
28,104

 
1

 
(21
)
 
28,084

Total
42,973

 
1

 
(21
)
 
42,953

Investments due in 4-12 months:
 
 
 
 
 
 
 
Corporate securities
63,204

 
61

 
(159
)
 
63,106

Total
63,204

 
61

 
(159
)
 
63,106

Investments due in 12 months or greater:
 
 
 
 
 
 
 
Corporate securities
126,375

 
145

 
(396
)
 
126,124

Total
126,375

 
145

 
(396
)
 
126,124

Total marketable securities
$
232,552

 
$
207

 
$
(576
)
 
$
232,183

Accrued interest receivable was $1.7 million at March 31, 2020 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.
Amortized cost and estimated fair market value of marketable securities classified as available-for-sale (excluding cash equivalents) at December 31, 2019, were as follows:
 
Amortized Cost
 
Gross Unrealized
 
Estimated Fair Market Value
(In thousands)
 
Gains
 
Losses
 
Investments due in 3 months or less:
 
 
 
 
 
 
 
Corporate securities
$
15,934

 
$
18

 
$

 
$
15,952

Total
15,934

 
18

 

 
15,952

Investments due in 4-12 months:
 
 
 
 
 
 
 
Corporate securities
71,223

 
269

 

 
71,492

Total
71,223

 
269

 

 
71,492

Investments due in 12 months or greater:
 
 
 
 
 
 
 
Corporate securities
144,658

 
302

 

 
144,954

Total
144,658

 
302

 
(6
)
 
144,954

Total marketable securities
$
231,815

 
$
589

 
$
(6
)
 
$
232,398


Accrued interest receivable was $1.3 million at December 31, 2019 and was recorded within prepaid expenses and other current assets on the condensed consolidated balance sheet.

12

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes marketable securities classified as available-for-sale (excluding cash equivalents) in a continuous unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2020 and December 31, 2019:
 
Less Than 12 Months
 
12 Months or Longer
 
Total
(In thousands)
Estimated Fair Market Value
 
Gross Unrealized Losses
 
Estimated Fair Market Value
 
Gross Unrealized Losses
 
Estimated Fair Market Value
 
Gross Unrealized Losses
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
138,527

 
$
(576
)
 
$

 
$

 
$
138,527

 
$
(576
)
Total marketable securities
$
138,527

 
$
(576
)
 
$

 
$

 
$
138,527

 
$
(576
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
13,069

 
$
(6
)
 
$

 
$

 
$
13,069

 
$
(6
)
Total marketable securities
$
13,069

 
$
(6
)
 
$

 
$

 
$
13,069

 
$
(6
)

In the three months ended March 31, 2020, no unrealized losses on marketable securities were recognized in income. The Company does not intend to sell and it is unlikely that it will be required to sell the securities prior to their anticipated recovery. The issuers are high quality (investment grade) and the decline in fair value is largely due to changes in interest rates and other market conditions. Additionally, the issuers continue to make timely interest payments on the marketable securities with the fair value expected to recover as they reach maturity.

6. STOCK-BASED COMPENSATION:
The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three months ended March 31, 2020, and March 31, 2019:
 
Three Months Ended
(In thousands)
March 31, 2020
 
March 31, 2019
Cost of revenues
$
396

 
$
271

Research and development
2,109

 
1,632

Sales and marketing
1,392

 
1,061

General and administrative
2,813

 
1,443

Total stock-based compensation expense
$
6,710

 
$
4,407


Stock-based compensation expense in the three months ended March 31, 2020, was approximately $6.7 million, comprising approximately $5.0 million related to restricted stock unit (RSU) awards, $1.3 million related to performance-based (PSU) awards and long-term performance-based (PRSU) awards and $0.4 million related to the Company’s employee stock purchase plan. Stock-based compensation expense in the three months ended March 31, 2019, was approximately $4.4 million, comprising approximately $4.6 million related to RSUs, a reduction to expense of $0.6 million related to PSUs and PRSUs and $0.4 million related to the Company’s employee stock purchase plan.

13

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options
A summary of stock options outstanding as of March 31, 2020, and activity during the three months then ended, is presented below:
 
Shares
(In thousands)
 
Weighted-
Average
Exercise
Price
 
Weighted-Average
Remaining
Contractual
Term
(In years)
 
Aggregate
Intrinsic Value
(In thousands)
Outstanding at January 1, 2020
167

 
$
38.88

 
 
 
 
Granted

 

 
 
 
 
Exercised
(67
)
 
$
38.07

 
 
 
 
Forfeited or expired

 

 
 
 
 
Outstanding at March 31, 2020
100

 
$
39.42

 
1.50
 
$
4,893

Vested and exercisable at March 31, 2020
100

 
 
 
1.50
 
$
4,893

PSU Awards
Under the performance-based awards program, the Company grants awards in the performance year in an amount equal to twice the target number of shares to be issued if the maximum performance metrics are met. The number of shares that are released at the end of the performance year can range from zero to 200% of the target number depending on the Company’s performance. The performance metrics of this program are annual targets consisting of a combination of net revenue, non-GAAP operating income and strategic goals.
As the net revenue, non-GAAP operating income and strategic goals are considered performance conditions, expense associated with these awards, net of estimated forfeitures, is recognized over the service period based on an assessment of the achievement of the performance targets. The fair value of these PSUs is determined using the fair value of the Company’s common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.
In January 2020, it was determined that approximately 61,000 shares subject to the PSUs granted in 2019 vested in aggregate; the shares were released to the Company’s employees and executives in the first quarter of 2020.
A summary of PSUs outstanding as of March 31, 2020, and activity during the three months then ended, is presented below:
 
Shares
(In thousands)
 
Weighted- Average Grant Date Fair Value Per Share
 
Weighted-Average Remaining Contractual Term
(In years)
 
Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020
61

 
$
70.11

 
 
 
 
Granted
42

 
$
100.23

 
 
 
 
Vested
(61
)
 
$
70.11

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at March 31, 2020
42

 
$
100.23

 
0.75
 
$
3,728

Outstanding and expected to vest at March 31, 2020
42

 
 
 
0.75
 
$
3,728


PRSU Awards
            The Company's PRSU program provides for the issuance of PRSUs which will vest based on the Company's performance measured against the PRSU program's established performance targets. PRSUs are granted in an amount equal to twice the target number of shares to be issued if the maximum performance metrics are met. The actual number of shares the recipient receives is determined at the end of a three-year performance period based on results achieved versus the Company's performance goals, and may range from zero to 200% of the target number. The performance goals for PRSUs granted in fiscal 2018, 2019 and 2020 were based on the Company’s annual revenue growth over the respective three-year performance period.
Expense associated with these awards, net of estimated forfeitures, is recorded throughout the year depending on the number of shares expected to vest based on progress toward the performance target. If the performance conditions are not achieved, no compensation cost is recognized and any previously recognized compensation is reversed.

14

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In January 2020 it was determined that no shares subject to the PRSUs granted in 2017 vested in aggregate; thus no shares were released to the Company’s executives in the first quarter of 2020.
A summary of PRSUs outstanding as of March 31, 2020, and activity during the three months then ended, is presented below:
 
Shares
(In thousands)
 
Weighted- Average Grant Date Fair Value Per Share
 
Weighted-Average Remaining Contractual Term
(In years)
 
Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020
144

 
$
64.05

 
 
 
 
Granted
73

 
$
98.75

 
 
 
 
Vested

 

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at March 31, 2020
217

 
$
75.70

 
1.75
 
$
19,097

Outstanding and expected to vest at March 31, 2020
131

 
 
 
2.30
 
$
11,564


RSU Awards
A summary of RSUs outstanding as of March 31, 2020, and activity during the three months then ended, is presented below:
 
Shares
(In thousands)
 
Weighted- Average Grant Date Fair Value Per Share
 
Weighted-Average Remaining Contractual Term
(In years)
 
Aggregate Intrinsic Value
(In thousands)
Outstanding at January 1, 2020
860

 
$
62.66

 
 
 
 
Granted
70

 
$
97.97

 
 
 
 
Vested
(117
)
 
$
58.12

 
 
 
 
Forfeited
(3
)
 
$
64.40

 
 
 
 
Outstanding at March 31, 2020
810

 
$
66.39

 
2.02
 
$
71,528

Outstanding and expected to vest at March 31, 2020
752

 
 
 
1.55
 
$
66,443



7. SIGNIFICANT CUSTOMERS AND GEOGRAPHIC NET REVENUES:
Segment Reporting
The Company is organized and operates as one reportable segment, the design, development, manufacture and marketing of integrated circuits and related components for use primarily in the high-voltage power-conversion market. The Company’s chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.
Customer Concentration
The Company's top ten customers accounted for approximately 55% of net revenues for the three months ended March 31, 2020, and approximately 52% of net revenues in the corresponding period of the previous year. A significant portion of these revenues are attributable to sales of the Company’s products to distributors of electronic components. These distributors sell the Company’s products to a broad, diverse range of end users, including original equipment manufacturers, or OEMs, and merchant power supply manufacturers. Sales to distributors were $83.5 million and $69.8 million in the three months ended March 31, 2020 and 2019, respectively. Direct sales to OEMs and power-supply manufacturers accounted for the remainder.
In the three months ended March 31, 2020, two customers, distributors of the Company's products, accounted for more than 10% of the Company’s net revenues. In the three months ended March 31, 2019, one of the two customers accounted for more than 10% of the Company’s net revenues.
The following table discloses the customers’ percentage of revenues for the respective periods:
 
Three Months Ended
Customer
March 31, 2020
 
March 31, 2019
Avnet
11
%
 
13
%
Powertech Distribution Ltd.
11
%
 
*

*Total customer revenue was less than 10% of net revenues.

15

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

No other customers accounted for 10% or more of the Company’s net revenues in the periods presented.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and trade receivables. The Company does not have any off-balance-sheet credit exposure related to its customers. As of March 31, 2020, and December 31, 2019, 69% and 63%, respectively, of accounts receivable were concentrated with the Company’s top ten customers.
The following customers represented 10% or more of accounts receivable:
Customer
March 31, 2020
 
December 31, 2019
Powertech Distribution Ltd.
16
%
 
10
%
Avnet
13
%
 
*

Burnon International Ltd.
10
%
 
*


*Total customer accounts receivable was less than 10% of accounts receivable.
No other customers accounted for 10% or more of the Company’s accounts receivable in the periods presented.
Geographic Net Revenues
The Company markets its products globally through its sales personnel and a worldwide network of independent sales representatives and distributors. Geographic net revenues, based on “bill to” customer locations, for the three months ended March 31, 2020, and March 31, 2019, were as follows:

Three Months Ended
(In thousands)
March 31, 2020
 
March 31, 2019
United States of America
$
2,713

 
$
2,672

Hong Kong/China
60,413


47,229

Taiwan
6,479


6,672

Korea
10,357


8,542

Western Europe (excluding Germany)
10,035


10,901

Japan
3,905


3,650

Germany
5,567


4,927

Other
10,195


4,595

Total net revenues
$
109,664

 
$
89,188



8. STOCKHOLDERS’ EQUITY:
Common Stock Shares Outstanding
 
Three Months Ended
(In thousands)
March 31, 2020
 
March 31, 2019
Beginning balance
29,431

 
28,889

Common stock issued under employee stock plans
284

 
342

Repurchased
(24
)
 
(121
)
Ending balance
29,691

 
29,110


Common Stock Repurchases
As of December 31, 2019, the Company had approximately $43.9 million remaining under its stock-repurchase program. In the three months ended March 31, 2020, the Company repurchased approximately 24,000 shares of its common stock for approximately $2.0 million. As of March 31, 2020, the Company had approximately $41.9 million remaining under its current repurchase program, which has no expiration date. Authorization of future repurchase programs is at the discretion of the board of directors and will depend on the Company’s financial condition, results of operations, capital requirements, business conditions and other factors.
Cash Dividends
In January 2019, the Company’s board of directors declared four quarterly cash dividends in the amount of $0.17 per share to be paid to stockholders of record at the end of each quarter in 2019. In October 2019, the Company’s board of directors raised the cash dividends per share with the declaration of five cash dividends, consisting of (a) a dividend in the amount of $0.02 per share to be paid to stockholders of record at the end of the fourth quarter in 2019, which is in addition to the dividend in the amount of $0.17 per share to be paid to stockholders of record at the end of the fourth quarter in 2019 previously declared by the board in January 2019, and (b) a dividend in the amount of $0.19 per share to be paid to stockholders of record at the end of each quarter in 2020.
In April 2020, the Company’s board of directors raised the cash dividends further with the declaration of three cash dividends in the amount of $0.21 per share (in lieu of the $0.19 per share previously announced) to be paid to stockholders of record at the end of each of the second, third and fourth quarter in 2020.

16

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the three months ended March 31, 2020, and 2019, cash dividends declared and paid were as follows:
 
Three Months Ended
(In thousands, except per share amounts)
March 31, 2020
 
March 31, 2019
Dividends declared and paid
$
5,644

 
$
4,937

Dividends declared per common share
$
0.19

 
$
0.17



9. EARNINGS PER SHARE:
 Basic earnings per share are calculated by dividing net income by the weighted-average shares of common stock outstanding during the period. Diluted earnings per share are calculated by dividing net income by the weighted-average shares of common stock and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares included in this calculation consist of dilutive shares issuable upon the assumed exercise of outstanding common stock options, the assumed vesting of outstanding restricted stock units, the assumed issuance of awards under the stock purchase plan and contingently issuable performance-based awards, as computed using the treasury stock method.
A summary of the earnings per share calculation is as follows:    
 
Three Months Ended
(In thousands, except per share amounts)
March 31, 2020
 
March 31, 2019
Basic earnings per share:
 
 
 
Net income
$
15,886

 
$
7,233

Weighted-average common shares
29,602

 
28,951

Basic earnings per share
$
0.54

 
$
0.25

Diluted earnings per share: (1)
 
 
 
Net income
$
15,886

 
$
7,233

Weighted-average common shares
29,602

 
28,951

Effect of dilutive awards:
 
 
 
Employee stock plans
532

 
495

Diluted weighted-average common shares
30,134

 
29,446

Diluted earnings per share
$
0.53

 
$
0.25

_______________
(1)
The Company includes the shares underlying performance-based awards in the calculation of diluted earnings per share if the performance conditions have been satisfied as of the end of the reporting period and excludes such shares when the necessary conditions have not been met. The Company has excluded the shares underlying the outstanding performance-based awards in the 2020 and 2019 calculations as the shares were not contingently issuable as of the end of the reporting periods. 
In the three months ended March 31, 2020 and 2019, no outstanding stock awards were determined to be anti-dilutive and therefore excluded from the computation of diluted earnings per share.

10. PROVISION FOR INCOME TAXES:
Income-tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for certain discrete items which are fully recognized in the period they occur. Accordingly, the interim effective tax rate may not be reflective of the annual estimated effective tax rate.
The Company's effective tax rates for the three months ended March 31, 2020 and 2019, were 5.8% and 0.5%, respectively. In the three months ended March 31, 2020 and 2019, the effective tax rate was lower than the statutory federal income-tax rate of 21% due to the geographic distribution of the Company’s world-wide earnings in lower-tax jurisdictions, federal research tax credits and the recognition of excess tax benefits related to share-based payments. These benefits were partially offset by foreign income subject to U.S. tax, known as global intangible low-taxed income. The Company’s primary jurisdiction where foreign earnings are derived is the Cayman Islands, which is a non-taxing jurisdiction. Income earned in other foreign jurisdictions was not material. The Company has not been granted any incentivized tax rates and does not operate under any tax holidays in any jurisdiction.
As of March 31, 2020, the Company maintained a valuation allowance on its California deferred tax assets, New Jersey deferred tax assets, and capital losses for federal purposes, and a valuation allowance with respect to its deferred tax assets relating to tax credits in Canada.
Determining the consolidated provision for income-tax expense, income-tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which

17

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

11. COMMITMENTS:
Supplier Agreements
Under the terms of the Company's wafer-supply agreements with Seiko Epson Corporation ("Epson"), and ROHM Lapis Semiconductor Co., Ltd. ("Lapis") the wafers purchased from these suppliers are priced in U.S. dollars, with mutual sharing of the impact of fluctuations in the exchange rate between the Japanese yen and the U.S. dollar on future purchases. Each year, the Company's management and these two suppliers review and negotiate future pricing; the negotiated pricing is denominated in U.S. dollars but is subject to contractual exchange rate provisions. The fluctuation in the exchange rate is shared equally between the Company and each of these suppliers on future purchases.

12. LEGAL PROCEEDINGS AND CONTINGENCIES:
From time to time in the ordinary course of business, the Company becomes involved in lawsuits, or customers and distributors may make claims against the Company. In accordance with ASC 450-10, Contingencies, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
On April 1, 2016, Opticurrent, LLC filed a complaint against the Company in the United States District Court for the Eastern District of Texas. In its complaint, Opticurrent alleges that the Company has infringed and is infringing one patent pertaining to transistor switch devices. The Company filed a motion to transfer the case to California, which the Court granted, and the case was assigned to a new judge in San Francisco following the transfer. On December 21, 2018, the Court granted the Company’s challenge to Opticurrent’s damages expert but denied the Company’s motion for summary judgment. Following a trial in February 2019, a jury issued a finding of direct infringement by the Company but found that the Company did not induce infringement, and awarded Opticurrent damages of $6.7 million. The Company challenged those findings in post-trial proceedings, and the Court granted one of the Company’s post-trial motions, reducing the damages award to $1.2 million. The Company believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims through appeals, which are currently under way, with briefing completed and oral argument to follow in the coming months.
On June 19, 2019, Opticurrent, LLC filed a follow-on lawsuit accusing more of the Company’s products of infringing the same claim of the same patent asserted in the parties’ prior litigation, as described above. The Company believes it has strong defenses, and intends to vigorously defend itself against Opticurrent’s claims, with appeals to follow if necessary.
On January 6, 2020, the Company filed a complaint against CogniPower LLC for infringement of two of the Company’s patents and seeking a declaration of non-infringement with respect to three patents that CogniPower had charged the Company’s customers with infringing. The case is in its preliminary stages, and no schedule has been set for the case at this time, but the Company believes it has strong claims and defenses, and intends to vigorously defend itself against CogniPower’s infringement claims, with appeals to follow if necessary.
The Company is unable to predict the outcome of legal proceedings with certainty, and there can be no assurance that Power Integrations will prevail in the above-mentioned unsettled litigations. These litigations, whether or not determined in Power Integrations’ favor or settled, will be costly and will divert the efforts and attention of the Company’s management and technical personnel from normal business operations, potentially causing a material adverse effect on the business, financial condition and operating results. Currently, the Company is not able to estimate a loss or a range of loss for the ongoing litigation disclosed above, however adverse determinations in litigation could result in monetary losses, the loss of proprietary rights, subject the Company to significant liabilities, require Power Integrations to seek licenses from third parties or prevent the Company from licensing the technology, any of which could have a material adverse effect on the Company’s business, financial condition and operating results.

13. INDEMNIFICATIONS:
The Company sells products to its distributors under contracts, collectively referred to as Distributor Sales Agreements (“DSA”). Each DSA contains the relevant terms of the contractual arrangement with the distributor, and generally includes certain provisions for indemnifying the distributor against losses, expenses, and liabilities from damages that may be awarded against the distributor in the event the Company's products are found to infringe upon a patent, copyright, trademark, or other proprietary right of a third party (“Customer Indemnification”). The DSA generally limits the scope of and remedies for the Customer Indemnification obligations in a variety of industry-standard respects, including, but not limited to, limitations based on time and geography, and a

18

POWER INTEGRATIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

right to replace an infringing product. The Company also, from time to time, has granted a specific indemnification right to individual customers.
The Company believes its internal development processes and other policies and practices limit its exposure related to such indemnifications. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees' development work to the Company. To date, the Company has not had to reimburse any of its distributors or customers for any losses related to these indemnifications and no material claims were outstanding as of March 31, 2020. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnifications.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and our results of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements and management’s discussion and analysis of our financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 7, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, and in Part II, Item 1A - “Risk Factors” and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this report.
Overview
We design, develop and market analog and mixed-signal integrated circuits (ICs) and other electronic components and circuitry used in high-voltage power conversion. Our products are used in power converters that convert electricity from a high-voltage source to the type of power required for a specified downstream use. In most cases, this conversion entails, among other functions, converting alternating current (AC) to direct current (DC) or vice versa, reducing or increasing the voltage, and regulating the output voltage and/or current according to the customer’s specifications.
A large percentage of our products are ICs used in AC-DC power supplies, which convert the high-voltage AC from a wall outlet to the low-voltage DC required by most electronic devices. Power supplies incorporating our products are used with all manner of electronic products including mobile phones, computing and networking equipment, appliances, electronic utility meters, battery-powered tools, industrial controls, and “home-automation,” or “internet of things” applications such as networked thermostats, power strips and security devices. We also supply high-voltage LED drivers, which are AC-DC ICs specifically designed for lighting applications that utilize light-emitting diodes, and motor-driver ICs addressing brushless DC (BLDC) motors used in refrigerators, HVAC systems, ceiling fans and other consumer-appliance and light commercial applications.
We also offer high-voltage gate drivers - either standalone ICs or circuit boards containing ICs, electrical isolation components and other circuitry - used to operate high-voltage switches such as insulated-gate bipolar transistors (IGBTs) and silicon-carbide (SiC) MOSFETs. These combinations of switches and drivers are used for power conversion in high-power applications (i.e., power levels ranging from a few kilowatts up to one gigawatt) such as industrial motors, solar- and wind-power systems, electric vehicles and high-voltage DC transmission systems.
Our products bring a number of important benefits to the power-conversion market compared with less advanced alternatives, including reduced component count and design complexity, smaller size, higher reliability and reduced time-to-market. Our products also improve the energy efficiency of power converters, helping our customers meet the increasingly stringent efficiency standards that have been adopted around the world for many electronic products, and improving the efficacy of renewable-energy systems, electric vehicles and other high-power applications.
While the size of our addressable market fluctuates with changes in macroeconomic and industry conditions, the market has generally exhibited a modest growth rate over time as growth in the unit volume of power converters has been offset to a large degree by reductions in the average selling price of components in this market. Therefore, the growth of our business depends largely on increasing our penetration of the markets that we serve and on further expanding our addressable market. Our growth strategy includes the following elements:
Increase our penetration of the markets we serve. We currently address AC-DC applications with power outputs up to approximately 500 watts, gate-driver applications of approximately ten kilowatts and higher, and motor-drive applications up to approximately 400 watts. Through our research and development efforts, we seek to introduce more advanced products for these markets offering higher levels of integration and performance compared to earlier products. We also continue to expand our sales and application-engineering staff and our network of distributors, as well as our offerings of technical documentation and design-support tools and services to help customers use our products. These tools and services include our PI Expert™ design software, which we offer free of charge, and our transformer-sample service.
Our market-penetration strategy also includes capitalizing on the importance of energy efficiency and renewable energy in the power conversion market. For example, our EcoSmart™ technology drastically reduces the amount of energy consumed by electronic products when they are not in use, helping our customers comply with regulations that seek to curb this so-called “standby” energy consumption. Also, our gate-driver products are critical components in energy-efficient DC motor drives, high-voltage DC transmission systems, solar and wind energy systems and electric transportation applications.

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Increase the size of our addressable market. Prior to 2010 our addressable market consisted of AC-DC applications with up to about 50 watts of output, a served available market (SAM) opportunity of approximately $1.5 billion. Since that time we have expanded our SAM to more than $4 billion through a variety of means. These include the introduction of products that enable us to address higher-power AC-DC applications (such as our Hiper™ product families), the introduction of LED-driver products, and our entry into the gate-driver market through the acquisition of CT-Concept Technologie AG in 2012. In 2016 we introduced the SCALE-iDriverTM family of gate-driver ICs, broadening the range of gate-driver applications we can address, and in 2018 we introduced our BridgeSwitch™ motor-driver ICs, addressing BLDC motors, as described above.
Also contributing to our SAM expansion has been the emergence of new applications within the power ranges that our products can address. For example, applications such as “smart” utility meters, battery-powered lawn equipment and bicycles, and USB power receptacles (often installed alongside traditional AC wall outlets) can incorporate our products. The increased use of electronic intelligence and connectivity in consumer appliances has also enhanced our SAM. Finally, we have enhanced our SAM through the development of new technologies that increase the value (and therefore the average selling prices) of our products. For example, our InnoSwitch™ ICs integrate circuitry from the secondary, or low-voltage, side of AC-DC power supplies, whereas earlier product families integrated circuitry only on the primary, or high-voltage side. In 2019 we introduced new members of our InnoSwitch™ family incorporating gallium-nitride (GaN) transistors, which enable a higher level of energy efficiency than ICs with traditional silicon transistors.
We intend to continue expanding our SAM in the years ahead through all of the means described above.
Our quarterly operating results are difficult to predict and subject to significant fluctuations. We plan our production and inventory levels based on internal forecasts of projected customer demand, which are highly unpredictable and can fluctuate substantially. Customers typically may cancel or reschedule orders on short notice without significant penalty and, conversely, often place orders with very short lead times to delivery. Also, external factors such as global economic conditions and supply-chain dynamics can cause our operating results to be volatile. In particular, the severe economic disruption caused by the global novel coronavirus pandemic (COVID-19) may affect the demand for our products and make our results more difficult to forecast. Furthermore, because our industry is intensely price-sensitive, our gross margin (gross profit divided by net revenues) is subject to change based on the relative pricing of solutions that compete with ours. Variations in product mix, end-market mix and customer mix can also cause our gross margin to fluctuate. Because we purchase a large percentage of our silicon wafers from foundries located in Japan, our gross margin is influenced by fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. Changes in the prices of raw materials used in our products, such as copper and gold, can also affect our gross margin. Although our wafer-fabrication and assembly operations are outsourced, as are most of our test operations, a portion of our production costs are fixed in nature. As a result, our unit costs and gross margin are impacted by the volume of units we produce.
Recent Results
Our net revenues were $109.7 million and $89.2 million in the three months ended March 31, 2020 and 2019, respectively. The increase in revenues was primarily due to growth in the consumer end market, particularly increased sales into comfort-appliances such as air conditioners, as well as the communications end market, reflecting increased adoption of higher-power chargers for mobile phones.
Our top ten customers, including distributors that resell to original equipment manufacturers, or OEMs, and merchant power supply manufacturers, accounted for 55% and 52% of our net revenues in the three months ended March 31, 2020 and 2019, respectively. In the three months ended March 31, 2020, two customers, both distributors of our products, each accounted for approximately 11% of our net revenues. In the three months ended March 31, 2019, one customer accounted for approximately 13% of our net revenues. International sales accounted for 98% and 97% of our net revenues in the three months ended March 31, 2020 and 2019, respectively.
Our gross margin for the three months ended March 31, 2020 and 2019 was 51.5%, and 51.0%, respectively. The increase in gross margin was due to a favorable change in end-market mix with a greater amount of revenues coming from higher-margin end markets.
Total operating expenses were $41.4 million and $39.4 million in the three months ended March 31, 2020 and 2019, respectively. The increase was due primarily to higher salary and related expenses driven by the expansion of our workforce, as well as higher stock-based compensation expense related to performance-based awards. These expenses were partially offset by lower patent-litigation expense reflecting the recent conclusion of our litigation with ON Semiconductor, as well as lower travel expenses due to restrictions associated with the COVID-19 pandemic.
COVID-19 Pandemic
The COVID-19 pandemic has disrupted everyday life and markets worldwide, and governments around the world have imposed restrictions aimed at controlling the spread of the virus, including shelter-in-place orders, travel restrictions, business

21


shutdowns and border closures. Since March 16, 2020 our San Jose headquarters location has been subject to a shelter-in-place order, under which most of our employees have been required to work from home; other locations around the world have also been subject to such restrictions. We have implemented a variety of measures to protect the health and safety of those employees whose responsibilities require them to go to our office locations, including the provision of masks and sanitizers, and regular deep cleaning of our facilities. While it is uncertain when we will be able to return to normal working conditions, we believe that we are able to conduct our day-to-day operations effectively in spite of the restrictions.

While we do not believe our recent results have been impacted materially by the pandemic, we believe our results in future periods are likely to be affected as the economic downturn stemming from the pandemic reduces demand for end products that incorporate our products. Also, the pandemic may impact our ability to supply products to our customers if our suppliers are unable to obtain necessary raw materials or other inputs, if our manufacturing partners are unable to staff their manufacturing facilities, or if key logistical elements of our supply chain such as warehousing or shipping services are disrupted. We have taken steps to reduce the effects of such supply disruptions, including higher-than-normal levels of inventory of wafers and finished goods, safety stocks of certain key inputs, and multiple sources for most of our products. The supply of wafers from our foundry partners has not been interrupted; however, government-mandated closures in China, Malaysia, Sri Lanka and Philippines have caused temporary shutdowns at our assembly and test sub-contractors in those countries. All of the affected sub-contractors have either fully or partially resumed operations. While these disruptions have resulted in delayed shipments to some customers, we believe our mitigation efforts have been effective at preventing a material impact to our results.
 
In anticipation of reduced demand for our products in future periods, we have adjusted our near-term operating-expense and capital-spending plans, such as slowing the pace of hiring, and will continue to make adjustments as business conditions change. However, we believe our business is fundamentally sound with strong, long-term growth prospects and ample cash resources. We have not reduced headcount and intend to continue investing in research and development and other functions necessary to support our future growth. We also intend to continue our cash dividend and stock repurchase programs; however, if the economy deteriorates more than we expect or our business outlook changes, our board of directors may choose to suspend or alter these programs at its discretion. For additional discussion regarding COVID-19 business risks refer to Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q.


Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those listed below. We base our estimates on historical facts and various other assumptions that we believe to be reasonable at the time the estimates are made. Actual results could differ from those estimates.
Our critical accounting policies are as follows:
revenue recognition;
stock-based compensation;
estimating write-downs for excess and obsolete inventory;
income taxes;
business combinations; and
goodwill and intangible assets.
Our critical accounting policies are important to the portrayal of our financial condition and results of operations, and require us to make judgments and estimates about matters that are inherently uncertain. There have been no material changes to our critical accounting policies and estimates disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, in each case in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 7, 2020.


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Results of Operations